The Murray Hill, New Jersey company's full year looked just as good. Net income jumped 46% to $3.8 billion (excluding one-time events), or $1.22 per share, compared to $0.86 per share last year and ahead of analyst estimates by $0.02. Revenue grew 20% -- in line with management's goal of increasing top-line growth by at least 19% -- to $38 billion, up from $31.8 billion a year ago.

High demand from local exchange carriers, wireless service providers, and long distance carriers drove sales. "This was the strongest quarter and the strongest year in Lucent's history," said Richard McGinn, Lucent's chairman and chief executive officer.

The company, which is capitalizing on explosive growth in a telecom industry expected to reach $650 billion by 2001, has been a marvelous investment since being spun off from AT&T(NYSE: T). Its stock debuted on the New York Stock Exchange April 4, 1996 at around $9 per share (adjusted for splits and dividends reinvested), and is now trading at around $65. That's almost 650% growth in a little over three years.

From a commercial standpoint, Lucent is as strong as a horse. It's the market leader in optical networking, U.S. switching systems, and U.S. wireless infrastructure equipment, as well as numerous other industry segments. Its research and development division, Bell Labs, is world-famous. Eleven Nobel Prize winners worked at Bell Labs, which created the transistor, the laser, and the communications satellite.

Still, the company's stock has languished since July after hitting a 52-week high of $79 3/4 on fears about the strength of its balance sheet. At issue were accounts receivable and inventory, two items every company must keep under tight control since both represent a serious drag on cash. Investors should look for these items to grow no faster than sales, and, ideally, they would grow slower.

A look at Lucent's income statements and balance sheets from June 30, 1999 and June 30, 1998 shows that Lucent's sales grew about 18.6% over that period, while accounts receivable and inventory grew 63% and 74%, respectively. Investors realized the discrepancy and Lucent's stock suffered after the July high -- once everyone got a look at the Q3 balance sheet.

The company made solid progress in this area over the last two quarters. Days sales outstanding, a measure of how long it takes the company to collect accounts receivable, shrank 10 days in the last six months and now stands at about 85. In addition, the company sold off more than $130 million in inventory over the last three months.

This said, the levels are still higher than Fools like to see. Sales for the year grew 20% while accounts receivable and inventory grew 41% and 54%, respectively. Now, Lucent encourages investors to compare balance sheet accounts from quarter to quarter rather than year to year, and the growth is much more in line with expectations using this method. But whether you look at the numbers quarterly or annually, the accounts still represent a cash drag -- money that has to be collected and inventories that must be sold, or written off, at some point.

Investors aren't out of line looking at things on a year-over-year basis, especially from a company like Lucent, which carries a price-to-earnings ratio of around 53.

At the same time, investors should understand that Lucent's market is changing fast, and that requires tough adjustments by management. A few years ago, the company sold to a handful of services providers while today its sells to more than 1,000. Also, international sales have grown from 23% of revenue to 32% over the last three years. Management has to react to these changes in its customer base virtually overnight, and that makes asset management a constant challenge.

The company has an excellent track record as far as rewarding shareholders. Take it as a positive sign that the company is paying close attention to its balance sheet and expects additional improvement. Investors should probably wait for this to happen before moving forward.